OPEN BOOK ACCOUNTING AND RESOURCE INTERDEPENDENCIES

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Over the past few decades, firms have arguably become more dependent on each other. On average, purchased products and services account for more than 50 % of the total cost of large firms. In addition, they have become more complex, requiring closer co-operations between buyers and suppliers.

This development has also been reflected in the growing literature on Open Book Accounting (OBA). It deals with the systematic exchange of confidential financial and nonfinancial information that legally independent business partners undertake with the aim to manage their interdependencies. Prior research has observed large differences in OBA depending on whether the exchanged product is standardised or designed by the buyer, the supplier or both parties together. At the same time, limited attention has been paid to how OBA might be used in capital equipment sales. Capital equipment is characterised by its need for support with spare parts and services over its extended life cycles. High opportunity costs might also arise whenever it cannot be used due to scheduled services or unexpected breakdowns.

The thesis analyses consequently how OBA is designed and used in the embedded buyer-supplier relationship between a manufacturer of capital equipment and one of its major customers. With its detailed observa- tions, the study contributes also to an improved general understanding of the interconnection between inter-organisational and intra-organisational designs and uses of OBA information. Moreover, it challenges current views of OBA as primarily increasing visibility. In contrast, it illustrates how increases and decreases of visibility are simultaneously and continuously negotiated between actors in industrial networks.

CHRISTOPH SCHNEIDER holds a Bachelor degree in Business Administration from the University of Mannheim, Germany, and a double Master degree in Accounting and International Management (CEMS) from the Stockholm School of Economics, Sweden.

Between 2011 and 2018, he was a PhD student at the Stockholm School of Economics. Currently, he works as project controller at an international truck and bus company.

Christoph Schneider

OPEN BOOK ACCOUNTING AND RESOURCE INTERDEPENDENCIES

THE CASE OF CAPITAL EQUIPMENT SALES

Christoph Schneider OPEN BOOK ACCOUNTING AND RESOURCE INTERDEPENDENCIES

ISBN 978-91-7731-101-0

DOCTORAL DISSERTATION IN BUSINESS ADMINISTRATION STOCKHOLM SCHOOL OF ECONOMICS, SWEDEN 2018

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Over the past few decades, firms have arguably become more dependent on each other. On average, purchased products and services account for more than 50 % of the total cost of large firms. In addition, they have become more complex, requiring closer co-operations between buyers and suppliers.

This development has also been reflected in the growing literature on Open Book Accounting (OBA). It deals with the systematic exchange of confidential financial and nonfinancial information that legally independent business partners undertake with the aim to manage their interdependencies. Prior research has observed large differences in OBA depending on whether the exchanged product is standardised or designed by the buyer, the supplier or both parties together. At the same time, limited attention has been paid to how OBA might be used in capital equipment sales. Capital equipment is characterised by its need for support with spare parts and services over its extended life cycles. High opportunity costs might also arise whenever it cannot be used due to scheduled services or unexpected breakdowns.

The thesis analyses consequently how OBA is designed and used in the embedded buyer-supplier relationship between a manufacturer of capital equipment and one of its major customers. With its detailed observa- tions, the study contributes also to an improved general understanding of the interconnection between inter-organisational and intra-organisational designs and uses of OBA information. Moreover, it challenges current views of OBA as primarily increasing visibility. In contrast, it illustrates how increases and decreases of visibility are simultaneously and continuously negotiated between actors in industrial networks.

CHRISTOPH SCHNEIDER holds a Bachelor degree in Business Administration from the University of Mannheim, Germany, and a double Master degree in Accounting and International Management (CEMS) from the Stockholm School of Economics, Sweden.

Between 2011 and 2018, he was a PhD student at the Stockholm School of Economics. Currently, he works as project controller at an international truck and bus company.

OPEN BOOK ACCOUNTING AND RESOURCE INTERDEPENDENCIES

THE CASE OF CAPITAL EQUIPMENT SALES

Christoph Schneider OPEN BOOK ACCOUNTING AND RESOURCE INTERDEPENDENCIES

ISBN 978-91-7731-101-0

DOCTORAL DISSERTATION IN BUSINESS ADMINISTRATION STOCKHOLM SCHOOL OF ECONOMICS, SWEDEN 2018

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Open Book Accounting and Resource Interdependencies

The Case of Capital Equipment Sales Christoph Schneider

Akademisk avhandling

som för avläggande av ekonomie doktorsexamen vid Handelshögskolan i Stockholm

framläggs för offentlig granskning fredagen den 30 november 2018, kl 13.15,

sal Ragnar, Handelshögskolan, Sveavägen 65, Stockholm

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Open Book Accounting and Resource Interdependencies

The Case of Capital Equipment Sales

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Open Book Accounting and Resource Interdependencies

The Case of Capital Equipment Sales

Christoph Schneider

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Dissertation for the Degree of Doctor of Philosophy, Ph.D., in Business Administration

Stockholm School of Economics, 2018

Open Book Accounting and Resource Interdependencies:

The Case of Capital Equipment Sales

ISBN 978-91-7731-101-0 (printed) ISBN 978-91-7731-102-7 (pdf) Front cover illustration:

Nicklas Gustafsson, ARCTISTIC, 2014 Printed by:

Brand Factory, Gothenburg, 2018 Keywords:

Open Book Accounting, Life Cycle Cost, Capital Equipment, Inter-organisational Cost Management, Industrial Networks

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To my mom († 2015)

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Foreword

This volume is the result of a research project carried out at the Department of Accounting at the Stockholm School of Economics (SSE).

This volume is submitted as a doctor’s thesis at SSE. In keeping with the policies of SSE, the author has been entirely free to conduct and present his research in the manner of his choosing as an expression of his own ideas.

SSE is grateful for the financial support provided by Carl Silfvén stipend- iefond, KPMG Bohlin AB:s Stipendiestiftelse and Torsten Söderbergs Stiftelse which has made it possible to fulfill the project.

Göran Lindqvist Johnny Lind

Director of Research Professor and Head of the Stockholm School of Economics Department of Accounting

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Acknowledgements

I am extremely grateful to the many people who have supported me over the course of my PhD studies at the Stockholm School of Economics. This thesis would not have been possible without your contributions and encouragement.

First, I would like to thank the members of my supervision committee who guided me in the process of becoming an independent researcher. As my main supervisor, Professor Johnny Lind accepted me as a foreign PhD student, read and commented on a countless number of drafts and helped me with practical arrangements from housing to scholarship applications. I am also grateful for his words and acts of encouragement during difficult times, when the project temporarily appeared to come to a halt. Associate Professor Martin Carlsson-Wall assisted in negotiating access to the anonymous case company, Heavy Machinery, and was never tired of discussing different ways of theorising in an energetic way. Associate Professor Mikael Cäker’s thoughtful and pragmatic advice helped me to improve the quality of the thesis in many respects.

I am also deeply indebted to the many informants at Heavy Machinery, the anonymous case company. Thank you for answering my seemingly end- less list of questions, allowing me to observe meetings and showing me around at different facilities around the world. I am extremely grateful for your openness and continuous support.

The Department of Accounting at the Stockholm School of Economics has been my “academic home” over the past seven years. I am grateful to all colleagues who have contributed to making the department such a pleasant workplace. I am particularly indebted to Associate Professor Ebba Sjögren who introduced me to the world of teaching, organised and facilitated methodology seminars for us PhD students and stopped by my office many times

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during evenings and weekends. Your support has been priceless. I am also grateful to Malin Lund who shared her own experiences and contributed with lots of positive energy. I really felt how the sun went up when you entered the office! A big thank you also to Anne Bengtsdotter and Christina Ekelin who make the department a better workplace every day and keep track of us and all administrative matters. Over the time, I have shared office with Tina Sigonius, Gabriel Karlberg, Patrik Tran and Anastasiya Klyuchko along some temporary visitors to the department. Our many discussions and lunches will never be forgotten. I am glad that I will have you around as reliable friends also in the future. Particular gratitude is also due to Péter Aleksziev, Emilia Cederberg, Carl Henning Christner, Florian Eugster, Anna-Stina Gillqvist, Milda Tylaite and Per Åhblom for different forms of interaction over the course of my PhD studies.

The School of Accounting at the University of New South Wales, Aus- tralia, provided me with a second academic home during my data collection in the Asia/Pacific region. A big thank you to Professor Clinton Free, Asso- ciate Christina Boedker and Associate Professor Peter Roebuck for hosting me and to Professor Mandy Cheng and Associate Professor Jane Baxter for an interesting PhD course. I am also extremely grateful to my office mates at UNSW (Ashna Prasad, Jahanzeb Khan, Tanya Fiedler and Jolien De Baer- demaeker) who turned this trip into an unforgettable experience and provided comfort when my mum got diagnosed with cancer.

Finally, this book would never have been finished without the encouragement, support and well needed distractions provided by my family and friends. I am particularly glad that I found my soul mate in Gunnel Axman who went through the bumpy ride together with me, hand in hand. I dedicate this thesis to my mother who would have been most glad and proud of all of us, but, unfortunately, died far too early to witness me crossing the finishing line in person.

Stockholm, July 20, 2018 Christoph Schneider

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List of Tables

Table 1 Four buyer-supplier interfaces ... 26

Table 2 Design and use of Open Book Accounting in standardised interfaces ... 42

Table 3 Design and use of Open Book Accounting in specified interfaces ... 53

Table 4 Design and use of Open Book Accounting in translation interfaces ... 65

Table 5 Design and use of Open Book Accounting in interactive interfaces ... 74

Table 6 Collected data ... 87

Table 7 Complexities in the provision of spare parts ... 107

Table 8 Four IASPs and their resources ... 116

Table 9 Modified translation buyer-supplier interfaces connected to the interface between Heavy Machinery and Contractor ... 123

Table 10 Cost elements not included in Life Cycle Cost calculations ... 140

Table 11 Internal adaptations and supplier co-operations to influence parallel information exchanges ... 158

Table 12 Areas to which Open Book Accounting directs attention on the level of the relationship between Heavy Machinery and Contractor .... 178

Table 13 Decisions made by Heavy Machinery and Contractor that are facilitated by the OBA information exchange ... 183

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xvi

Table 14 Areas to which Open Book Accounting directs attention on Heavy Machinery’s firm level ... 192 Table 15 Decisions made on Heavy Machinery’s firm level that are

facilitated by the OBA information exchange ... 206 Table 16 Areas to which the Open Book Accounting exchange between

Heavy Machinery and Contractor directs attention in indirectly

connected supplier relationships ... 216 Table 17 Decisions facilitated in indirectly connected modified

translation interfaces (Type 1) by Open Book Accounting ... 223 Table 18 Decisions facilitated in indirectly connected modified

translation interfaces (Type 2) by Open Book Accounting ... 230 Table 19 Decisions facilitated in indirectly connected modified

translation interfaces (Type 3) by Open Book Accounting ... 233 Table 20 The resource interface between Heavy Machinery and

Contractor ... 239 Table 21 Design of OBA in the studied interface ... 241 Table 22 Means implemented by Heavy Machinery to reduce

available information in the interface ... 243 Table 23 Attention-directing uses of OBA in the studied interface ... 250 Table 24 Intra-organisational units of Heavy Machinery that are directly

and indirectly involved in the OBA exchange with Contractor ... 261 Table 25 Use of Open Book Accounting on the firm-level at Heavy

Machinery ... 263 Table 26 Four ways of relating information exchanges to each other ... 280

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List of Figures

Figure 1 Overview of the thesis' disposition ... 8 Figure 2 Analytical framework ... 9 Figure 3 Illustration of a Life Cycle Cost calculation for a particular vehicle

model in the overview format – 5-year model ... 137 Figure 4 Graphical illustration of the Life Cycle Cost of a particular vehicle

model – 5-year model ... 137

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Chapter 1

Introduction

As a result of globalisation, rapid technological development and an increasing complexity of technical products, firms have become increasingly dependent on each other (Kraus and Lind, 2007). Survey studies have for example found that the 100 largest US firms have increased their spent on purchased products and services to more than 50 percent of their total costs on average. Depending on industry and company, this figure can rise to 70 to 80 percent of total costs (Anonymous, 2002). Similar developments have been reported for other parts of the world, such as Scandinavia (Gadde and Håkansson, 2001, Gadde et al., 2010). In addition to this relative increase in external sourcing, the characteristics of outsourced products and services have also changed, giving rise to a need for closer buyer-supplier interaction.

Cooper and Slagmulder (2004) have for example observed a change from mostly purchasing commodity products and processes to purchasing complex products and services based on proprietary supplier technology. Ac- cording to their studies, those products require a close buyer-supplier interaction to ensure an optimal specification from the perspective of both parties, thereby ensuring an optimal trade-off between quality, functionality and cost.

A common problem constitutes here that firms usually only exchange price information with each other (Kulmala, 2002). This means that a buyer only knows what a certain product or service costs in terms of purchasing price, but not what has caused this price in the form of necessary production steps and related costs in the upstream supply chain. Conversely, the supplier

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2 OPEN BOOK ACCOUNTING AND RESOURCE INTERDEPENDENCIES

does not know which consequential costs a certain product or service design causes in its customers’ and customers’ customers’ production processes.

This lack of insight makes it accordingly difficult to design products and associated processes that are optimal from a total cost perspective.

The exchange of additional, financial and nonfinancial information is accordingly required in order to manage interdependence in complex supply chains and networks (Mouritsen et al., 2001, Agndal and Nilsson, 2010, Caglio and Ditillo, 2012, Alenius et al., 2015). The study of such financial and nonfinancial information exchanges is the subject of the literature on Open Book Accounting (OBA). It can be defined as the systematic exchange of confiden- tial financial and nonfinancial information that legally independent business partners un- dertake with the aim to manage their interdependencies (see Chapter 2.2.1, page 14).

OBA has been established as a research field in the accounting literature in the beginning of the 1990s (see e.g. Munday, 1992, Otley, 1994, Hopwood, 1996) and grown since then (for previous reviews see Kulmala, 2002, Hoffjan and Kruse, 2006, Kajüter and Kulmala, 2010).

1.1 The concept of interdependence in the study of Open Book Accounting

The concept of interdependence has been at the heart of OBA since its very beginning (Munday, 1992, Otley et al., 1995, Hopwood, 1996). In one of the first calls for research, Hopwood (1996) for example asked for “a more ex- plicit awareness of the interdependency of action and the role which joint action can play in organizational success” (p. 589).

The meaning of the term interdependence is itself important as it suggests that both the buyer and the supplier are dependent on each other rather than one of the partners being solely dependent on the other (Oxford University Press, 2016a, 2016b). In cases of (one-sided) dependence, it has been argued that OBA can usually not be applied successfully for a range of reasons. For example, if the buyer is unilaterally dependent on the supplier, the supplier lacks the incentive to open its books (Kulmala, 2004, Romano and Formentini, 2012, Kumra et al., 2012). In turn, if the supplier is dependent on the buyer, it might be possible for the buyer to force the supplier to open

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its books. It has, however, been argued that suppliers try to refuse such requests due to the perceived risk of subsequently being pressed in prices (Munday, 1992, Kajüter and Kulmala, 2005, Caglio and Ditillo, 2012) and that, if they cannot refuse these requests, might falsify the provided information (Lamming, 1993, Lamming et al., 2001), exert little effort to save costs in the long-term (Munday, 1992) and/or develop negative attitudes to- wards the buyer, making future co-operations difficult (Windolph and Möller, 2012).

Interdependence can thus be seen as an important precondition for a mutually beneficial, long-term use of OBA. At the same time, while buyer- supplier relationships are usually characterised by interdependence in a range of areas, they are also characterised by independence in a range of other areas (see for example Ford et al., 1998, Araujo et al., 1999, 2016). A reason for this lies in that while interdependence provides benefits, entertaining interdependent relationships is also resource consuming and constrains firms in their ability to engage in relationships with third parties (Gadde and Snehota, 2000, Håkansson and Ford, 2002). In consequence, firms usually entertain a range of relationships with external business partners that are characterised by different degrees of interdependence and independence (Ford et al., 1998, Araujo et al., 1999, 2016).

Seen from this perspective, it is not surprising that scholars have observed different forms of OBA being applied in different buyer-supplier relationships, characterised by different kinds of interdependence (see for example Cooper and Slagmulder, 1999a, 2004, Agndal and Nilsson, 2010).

Early research has for example focused on OBA in relationships where interdependencies mostly arise from the buyer designing the product, but out- sourcing its production to a supplier (see e.g. Munday, 1992, Cooper and Yoshikawa, 1994). In these relationships, detailed financial and nonfinancial information with a focus on manufacturing costs are exchanged. This OBA information is then used to facilitate discussions on potential changes in the specification of the product and its cost consequences at the manufacturer and cost-plus based price negotiations.

As research progressed, it has also considered OBA in other types of relationships, characterised by other kinds of interdependencies. Some re- searchers have for example studied OBA in relationships where the supplier

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develops and produces a standardised product that is sold to many different buyers. Examples of such products are pharmaceutical drugs (Dekker and van Goor, 2000), nondurable consumer products (Dekker, 2003, Agndal and Nilsson, 2010) and standardised components and bulk material (Kulmala, 2004). OBA seems here not to include the exchange of detailed financial and nonfinancial information related to the manufacturing of the product, as the respective processes are independent of particular customers and thus managed independently by the buyer. Instead, information exchanges seem to focus on other areas in which interdependencies exist, i.e. the purchasing of raw and packaging material from sub-suppliers (Agndal and Nilsson, 2010, Romano and Formentini, 2012, Kumra et al., 2012), logistics (Dekker and van Goor, 2000, Dekker, 2003) and servicing (Kulmala, 2004).

Some scholars have later on also studied OBA in relationships in which the buyer delegates product development to the supplier based on some overarching technical and interface specifications (Cooper and Slagmulder, 1999a, 2004, Mouritsen et al., 2001). Other scholars have studied relationships in which product development is conducted jointly by the buyer and supplier (Cooper and Slagmulder, 1999a, 2004, Agndal and Nilsson, 2009).

In this research, quite fundamental differences in interdependence and OBA have also been found.

Interdependencies might sometimes also stretch beyond focal dyadic relationships, making the involvement of further firms into OBA necessary (Cooper and Yoshikawa, 1994, Carr and Ng, 1995, Dekker and van Goor, 2000, Dekker, 2003, Kulmala, 2004, Agndal and Nilsson, 2009, Romano and Formentini, 2012). Cooper and Yoshikawa (1994) have for example observed that buyers who specify the product, but outsource its production, might include the supplier’s sub-suppliers into OBA (see also Munday, 1992, Kajüter and Kulmala, 2005, Agndal and Nilsson, 2008, Alenius et al., 2015).

This is so as the supplier itself outsources the manufacturing of some sub- components to sub-suppliers, which in turn might stand for a large propor- tion of the product’s cost. Likewise, any delivery problems between the sub- supplier and the supplier might ultimately also affect the buyer. The buyer might thus want to discuss the product specification and proactively learn about and manage potential supply chain risks. In addition, the buyer might

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want to exploit indirect links between its different suppliers and their sub- suppliers to create economies of scale and scope.

As prior research on OBA has thus enquired into a wider array of focal buyer-supplier relationships, characterised by different kinds of interdependencies, differences in OBA have been observed and discussed.

1.2 Problematizing prior research on Open Book Accounting

OBA has thus grown to become an important and varied stream of research within management accounting. At the same time, some theoretical challenges continue to exist in this field of research. One identified gap is that prior research seems to have primarily focused on the interdependencies that arise from the division of product development and manufacturing between buyers and suppliers and their influence on OBA. As I have begun to discuss above, prior research has discerned considerable differences in interdependence and OBA, depending on whether the product is standardised in characteristic or designed by the buyer, the supplier or jointly by both. Significant interdependencies do, however, not only arise during the development and production of products, but also during their use (Baraldi and Strömsten, 2006, Håkansson and Waluszewski, 2007).

This is in particular the case for capital equipment, and, thus, the equipment that firms continuously use in their production (Oxford University Press, 2017). While capital equipment is, like other products, often designed and produced by the supplier on the buyer’s specific requirements, it requires frequent maintenance with spare parts, labour and supplementary products and services (Benton, 2010, Burt et al., 2010, Hofmann et al., 2012). In addition, it requires the buyer and supplier to invest into particular supporting facilities, such as maintenance workshops and stocks of spare parts. Moreo- ver, different organisational units of the buyer and supplier are commonly involved in its acquisition, use and maintenance. Burt et al. (2010) observes for example that operations, plant engineering, purchasing and marketing de- partments of the buyer are often involved in the purchasing and use of the

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equipment. Similarly, different organisational units of the supplier and indirectly connected relationships might be involved. Significant interdependencies arise accordingly between the buyer and supplier due to its need to not only develop and produce capital equipment, but also maintain it over extended periods.

These interdependencies are also visible financially. Schweiger (2009) observes for example that, depending on the type of capital equipment, the initial purchase price constitutes only 5-50 percent of total cost over its life cycle. Moreover, significant opportunity costs arise whenever the equipment cannot be used due to maintenance or unexpected breakdowns. Schweiger (2009) reports opportunity costs of up to 1,000 Euros per minute for a certain machine, while Burt et al. (2010) estimate the downtime costs due to a failing machine in the production facilities of an automobile assembler to 26,000 dollars per minute.

As most costs arise only during its use, but are intimately related to the initial product design, some authors have suggested to design capital equipment with its complete Life Cycle Cost in mind (LCC; Fabrycky and Blanchard, 1991, Asiedu and Gu, 1998, Wouters and Morales, 2014). Simi- larly, some scholars have provided the normative advice to evaluate capital equipment purchases from a life cycle cost perspective (see for example Ellram, 1995, Ellram and Siferd, 1998). From a normative standpoint, pror literature has accordingly outlined how LCCs can be calculated by discount- ing connected future cash flows and making uncertainties visible with the help of Monte Carlo simulations.

At the same time, none of the two literatures have enquired into behavioural aspects related to the potential exchange and use of LCC calculations and other pieces of information between buyers and suppliers of capital equipment. Reviewing the LCC literature from an accounting perspective, Dunk (2004) has thus also concluded:

“Although significant benefits are attributed to life cycle cost analysis, there is little evidence regarding the extent of its application in organizational settings.

Moreover, there is scant systematic evidence available with respect to the array of factors that may influence its use” (p. 403).

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A study of the interdependencies and OBA in capital equipment sales might thus be considered an important area along which the literature might be expanded. Capital equipment sales appear to be highly impacted by the outlined maintenance-related resource interdependencies, which in turn might leave a significant imprint on OBA in the respective buyer-supplier relationships. In addition, the study of OBA in capital equipment sales might also highlight new aspects of OBA in general that have not been discussed in prior literature, but might be noticed when studying OBA in this particular setting. A study of OBA in capital equipment sales might accordingly not only help to refine prior theory, but also lead to new discoveries related to the complex empirical phenomenon in general (Keating, 1995, Dubois and Gadde, 2014).

1.3 Aim of the thesis

In line with this identified theoretical challenge, the following research aim can be formulated:

• The aim of the thesis is to understand how the specific interdependencies existing in capital equipment sales impact OBA in this setting.

As part of this undertaking, some new, general aspects of OBA might also be discovered.

1.4 Outline of the thesis

With this aim in mind, the thesis is structured into nine chapters (Figure 1, page 8). Chapter 2 develops the analytical framework that is applied in the literature review and the empirical study. The framework further substanti- ates the link between OBA and interdependence and defines the two terms.

It also introduces a further distinction between the design and use of OBA and defines interdependence in the context of the thesis. Chapter 3 summarises extant research from the perspective of this framework. In Chapter 4, the methods applied in the empirical case study of OBA in capital equipment sales are described. Chapters 5 to 7 report the results of the empirical study.

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In particular, Chapter 5 describes the observed interdependencies, while Chapters 6 and 7 describe the design and use of OBA in capital equipment sales respectively. Finally, Chapter 8 compares and contrasts the empirical findings with extant literature and Chapter 9 summarises the thesis’ theoretical and practical contributions and provides recommendations for future research.

Figure 1 Overview of the thesis' disposition

Theory Method Empirical study Discussion &

Conclusion

Chapter 2 Analytical Framework

Chapter 3 Literature Review

Chapter 6 The design of OBA in the

interface between Heavy Machinery and

Contractor Chapter 4

Methodology and Research Design

Chapter 5 The interface between Heavy Machinery and

Contractor

Chapter 7 The use of OBA in the

interface between Heavy Machinery and

Contractor

Chapter 8 Discussion

Chapter 9 Summary and Future Research

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Chapter 2

Analytical framework

This chapter develops and explains the analytical framework on which both the literature review (Chapter 3) and the empirical study on Open Book Ac- counting (OBA) in capital equipment sales (Chapters 5-7) build. The framework highlights the interrelationship between the design and use of OBA and the interdependencies existing in particular focal, embedded buyer-supplier relationships (Figure 2). Before the individual elements of the framework are discussed, some theoretical arguments for the analytical link between OBA and interdependence are provided next.

Figure 2 Analytical framework

Resource interdependence in the buyer-supplier interface Open Book Accounting

Design Use

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2.1 Motivating the analytical link between Open Book Accounting and interdependence

From the beginning of the literature on OBA, it has been argued that OBA, in particular its design, is not generic, but is interrelated with the interdependencies existing in particular buyer-supplier relationships (see for example Lamming, 1993, Tomkins, 2001, Cooper and Slagmulder, 1999a, Cooper and Slagmulder, 2004). In an early contribution, Lamming (1993) for example observed with regard to the design of OBA:

“In practice, the customer should only require directly relevant data and should be able to justify any and all requests (i.e. rather than requiring card blanche access to the supplier’s costing systems)” (ibid, p. 214, emphasis in original)

Similarly, Tomkins (2001) observed that “[t]here is clearly a different emphasis in the detailed information content required for different types of al- liances” (pp. 181-2). In the analytical framework (Figure 2), OBA is accordingly linked to the interdependencies existing in particular relationships. Theoretical support for these analytical connections can be found in two complimentary lines of reasoning.

2.1.1 Bounded rationality

One motivation for the analytical link between OBA and interdependence can be found in the argument of bounded rationality (Simon, 1947, Cyert and March, 1963, within the industrial network approach, see e.g. Ford and Håkansson, 2006). While, under full rationality, firms might be seen as fully knowledgeable of all their direct and indirect interdependencies with business partners and having no need to differentiate the kind of information exchanged with different business partners¹, this is not the case under bounded rationality.

1 Fully rational firms, which are not limited in their perceptual or information processing capabilities, are able to exchange the same information with all firms they are directly or indirectly connected to. Given their information processing capabilities, they can analyse the data in the next step and extract the information they require in particular relationships.

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Bounded rationality highlights that firms are limited in their perception and information processing capabilities, which might make it difficult for them to behave completely rational in information exchanges. Firms might for example only be aware of some of their resource interdependencies with certain business partners (Weick, 1969, Pfeffer and Salancik, 1978). In addition, even if they had full information on all their interdependencies, firms might not necessarily be able to fully analyse and understand it. A consequence of this is that too much information from business partners might sometimes be as helpful as no information at all. Within the OBA literature, Lamming et al. (2004) have considered this by stating that providing too much information could even be intentionally used by business partners to

“actually blind or dazzle the receiver, or perhaps (…) to hide the fact that critically important parts are missing or false” (p. 299). On a related note, Kulp (2002) has also observed the importance of information precision and reliability in information exchanges.

The argument of bounded rationality can accordingly be seen as providing support for the bidirectional link between OBA and interdependence.

First, due to limits in perception and information processing, it is feasible to assume that there is not one single generic form of OBA. Rather, information exchanges might be adapted to the specific interdependencies at hand in particular relationships, and in particular to those that are perceived as “major problems” which business partners wish to manage with each other (Lamming, 1993, Lamming et al., 2001, 2004, Tomkins, 2001). In the light of information processing limits, this increases also the efficiency and effective- ness of OBA (Kulp, 2002, Caglio and Ditillo, 2012).² Second, the interdependencies that are considered as important to manage might change over time as firms apply OBA and learn about their different kinds of interdependencies. OBA might thus be expanded over time to additional, already existing interdependencies (see for example Alenius et al., 2015). Likewise, as buyers and suppliers manage their interdependencies with each other, they

2 This is in particular so as firms might use different accounting systems and definitions, necessitating either the costly development of common definitions or creating an understanding of each other’s definitions (Tomkins, 2001, Kulmala, 2004, Kajüter and Kulmala, 2005, Agndal and Nilsson, 2008). Without such definitions, firms are found being unable to understand and draw conclusions from exchanged data (Kulp, 2002).

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might also create new interdependencies (Alenius et al., 2015, Ford and Håkansson, 2006).

2.1.2 The coexistence of co-operation and self-interest in business relationships

Complimentary arguments for adapting OBA to the specific interdependencies at hand can be found in the observation that business partners are not only cooperative. In contrast, they also nurture their self-interests, which might lead to conflicts (Johanson and Mattsson, 1987, Håkansson and Snehota, 1995). As Håkansson and Snehota (1995) have for example observed:

“Elements of cooperation and conflict have been found to coexist in the atmos- phere of business relationships. There is an inherent conflict about the division of benefits from a relationship, but other conflicts also can arise over time. A relationship does not mean that all conflicts have been straightened out and re- solved once and for all” (p. 9).

Given the natural self-interest of business partners and the potential conflicts that might arise out of it, scholars have cautioned firms to consider that business partners might potentially misuse the conveyed data to their own advantage (see e.g. Gietzmann, 1996, Baiman and Rajan, 2002b). Several ways in which conveyed OBA information might be misused by business partners have been outlined by prior literature. These include buyers subsequently pressing their suppliers in price negotiations (e.g. Munday, 1992, Kajüter and Kulmala, 2005, Windolph and Möller, 2012), buyers changing suppliers based on the gained insights (Seal et al., 2004), buyers exploiting the conveyed ideas on their own (Baiman and Rajan, 2002b) or with direct competitors to the firm that originally conveyed the information, thereby reducing its competitive advantage (e.g. Jarimo and Kulmala, 2008, Cooper and Slagmulder, 2004, Romano and Formentini, 2012). Similarly, suppliers might consciously or unconsciously spread information from a particular buyer to other customers (Cooper and Slagmulder, 1999a, 2004). According to the

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literature, the risk of potential misuse is particularly high if information disclosure is one-sided and the conveyed information does not become out- dated over time (Cooper and Slagmulder, 1999a, Lamming et al., 2001, 2004).

Adapting OBA to the particular interdependencies that are to be managed actively with particular business partners can minimise such behavioural risks (Lamming et al., 2001, Tomkins, 2001, Cooper and Slagmulder, 1999a, 2004). First, the focus on areas of interdependence allows business partners to simultaneously exclude areas in which they might perceive themselves as independent and that thus might be of high importance for their network position (Lamming et al., 2001, 2004). Likewise, the exchange of information on areas of existing interdependence that are not yet to be managed actively might be deferred until later (Lamming et al., 2001).

Second, if information is limited to areas of interdependence, it is usually also specific to at least some degree. If subcontractors for example disclose manufacturing cost information on a particular product, it might be difficult to analyse this information in relation to other products provided by other suppliers, as the configuration of the products manufactured by them might differ (Cooper and Slagmulder, 1999a). This can be seen as reducing the risk of a potential misuse of such information.

Third, as interdependence suggests mutual dependence, it is usually difficult to manage with one-sided OBA information disclosure. Multilateral disclosure might thus become necessary, which in turn can create some trust and substantially reduce the risk of potential misuse of confidential information by business partners (Lamming et al., 2001, Cooper and Slagmulder, 2004). Accordingly, any business partner who misuses information received from others needs to fear that the other firm(s) might retaliate such behav- iour, e.g. by releasing equally sensitive data to competitors.

The discussion of firms’ natural self-interest provides thus complimentary argumentative support for the assumed connections in the framework.

In particular, behavioural risks associated to firms’ self-interest might pre- clude the implementation of a single generic OBA design with all business partners. Rather, firms might consider in a more detailed manner with whom they want to share which kind of information. As discussed, due to the lower associated risks, information on areas of interdependence that are to be managed jointly might be primarily exchanged (Lamming et al., 2001).

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Moreover, while the OBA design might be adapted to existing interdependencies between business partners, this might also hold the other way around. Adapting the degree of interdependence might thus be seen as a way to support the implementation of particular OBA designs. Interdependence with particular business partners might for example be increased by remov- ing a directly competing supplier from the supplier portfolio (Romano and Formentini, 2012) or increasing the number of components bought from a particular supplier (Cooper and Slagmulder, 1999a, 1999b, 2004). Reversely, interdependence might also be decreased by establishing relationships with alternative suppliers or customers (Cooper and Slagmulder, 1999a).

Complimentary arguments associated with the concept of bounded rationality and the natural self-interest of business partners lend thus strong support for the conceptual link between OBA and interdependence. Next, these two elements are described in detail.

2.2 Open Book Accounting

2.2.1 Defining Open Book Accounting

Interdependence commonly provides the backdrop for interaction (Håkansson, 1982, Ford and Håkansson, 2006) and thus information exchanges. At the same time, not all information exchanges might be regarded as OBA (see in particular Hoffjan and Kruse, 2006, Caglio and Ditillo, 2012).

In the context of this thesis, OBA is defined as the systematic exchange of confi- dential financial and nonfinancial information that legally independent business partners undertake with the aim to manage their interdependencies.

OBA concerns accordingly the exchange of both financial and nonfinancial information between legally independent business partners. In addition to financial information (Hoffjan and Kruse, 2006), nonfinancial information has been pointed out as important to manage interdependencies between firms for several reasons (Kajüter and Kulmala, 2005, Mouritsen et al., 2001, Agndal and Nilsson, 2010, Caglio and Ditillo, 2012, Alenius et al., 2015). To begin with, nonfinancial information, such as production capacity, lead times, set-up times and the rate of inventory turnover, has been found to aid

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the understanding of financial information (Mouritsen et al., 2001). Moreo- ver, nonfinancial information has been regarded as important for the management of certain risks that are difficult to depict in absolute financial terms, but can potentially lead to severe financial consequences. Agndal and Nilsson (2010) observe for example that buyers working on principles of lean production might be severely impacted by delivery failures or quality problems of their suppliers. Firms seem to manage these risks by systematically moni- toring nonfinancial indicators, such as delivery precision and production capacity of their suppliers, and requiring regular updates on the suppliers’

financial strength and policies with regards to product development, quality, logistics, purchasing, risk management and ethics (Agndal and Nilsson, 2010, Kumra et al., 2012). Furthermore, buyers often provide different kinds of nonfinancial information to their suppliers, such as access to new product development plans and production schedules. This information is not only particularly valuable to coordinate the work carried out in the different firms (Gulati and Singh, 1998, Tomkins, 2001, Dekker, 2004). The degree of con- fidentiality of the provided information can also be seen as an expression of trust and important ingredient to furthering mutual interdependence between business partners (Tomkins, 2001, Cooper and Slagmulder, 2004). The inclusion of nonfinancial information is accordingly also important as these important kinds of information might otherwise be missed out.

In order to qualify as OBA, the exchanged financial and nonfinancial information needs to be confidential in character and should thus not be available by other means (Lamming, 1993, Hoffjan and Kruse, 2006, Caglio and Ditillo, 2012). In addition, OBA information is usually assumed to be exchanged in a systematic manner rather than on an ad hoc basis (Kajüter and Kulmala, 2005, Hoffjan and Kruse, 2006, Caglio and Ditillo, 2012).

2.2.2 The design of Open Book Accounting

A common problem of prior research is that it has referred to OBA without explicitly stating what it “actually entails” (Agndal and Nilsson, 2010, p. 163, see also Hoffjan and Kruse, 2006). In an attempt to improve conceptual clar- ity, a distinction between the design and the use of OBA is made in the context of this thesis (see also Agndal and Nilsson, 2010).

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For the conceptualisation of the design of Open Book Accounting, I draw inspiration from the general model of accounting information system design developed by Gordon et al. (1978). Following their model, the design of accounting systems concerns the specification of three elements: pre- parer(s), recipient(s) and the characteristics of the particular information they exchange.³ As part of their example, Gordon et al. (1978) note also that individual organisational units might be recipients of information from certain units and preparers of information to other units in the next step. They thus acknowledge that the design needs to take into account that the preparation and receipt of information is a distributed activity that might include several, directly and indirectly involved organisational units.

As Gordon et al.’s (1978) model has been originally developed with intra- organisational accounting systems in mind, in line with its original ideas, it requires some adaptation to the study of OBA. Three points shall be highlighted in particular. A first aspect that might require further consideration is the distinction into preparers and recipients. While this distinction might have been useful for the study of intra-organisational information-flows, it becomes somewhat problematic when discussing inter-organisational information exchanges. In those, individual firms might act as both preparers and recipients at the same point in time and with regard to the same specific interdependencies. At the same time, as Gordon et al. (1978) have highlighted, it is always important to note who exactly is allowed to enter or receive certain kinds of information and who is excluded from it. This has also been highlighted by research on OBA (see for example Lamming et al., 2001). As a result of this contemplation, it is suggested to adopt the term of

“participants in the information exchange” as a more general term and, at the same time, to consciously discuss for each (group of) participant(s), which information they provide and/or receive.

A second aspect that requires more consideration is Gordon et al.’s (1978) observation that different participants might be directly and indirectly

3 Gordon et al.’s (1978) model includes also a fourth element concerning the technology employed to trans- mit the information. They list a number of different technologies, such as written reports, online-computer data, telephone calls and face-to-face meetings. As the way in which OBA information is exchanged has not been discussed extensively in the prior literature (see e.g. Caglio & Ditillo, 2012), this element is side- lined in the analytical framework and the subsequent literature review. We will, however, reconsider it as part of the discussion chapter (Chapter 8.2).

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involved in the information exchange. This opens up for the study of the design of accounting systems from a network perspective. Firms participat- ing in OBA usually include the focal buyer and supplier, but might also include indirectly connected firms, such as sub-suppliers or competitors to any of the participants (see e.g. Cooper and Yoshikawa, 1994, Dekker, 2003, Kulmala, 2004).

A third aspect concerns the characteristics of the information that are exchanged. In the context of this thesis on OBA, one characteristic, the fi- nancial and nonfinancial information data items that are shared, appears par- ticularly relevant. Gordon et al. (1978) observe that different data items might be communicated, such as production rate data or inventory levels. Prior research has found that the OBA design might differ with regard to the data elements that are exchanged (Carr and Ng, 1995, Cooper and Slagmulder, 2004, Hoffjan and Kruse, 2006, Agndal and Nilsson, 2010). It might for example include data on manufacturing operations (see for example Cooper and Yoshikawa, 1994, Mouritsen et al., 2001, Kajüter and Kulmala, 2005) or on logistics only in particular relationships (see for example Dekker and van Goor, 2000, Dekker, 2003).

2.2.3 The use of Open Book Accounting

The design of OBA sets the framework for the use of OBA. While accounting information might be used to several ends, two particular uses of OBA are distinguished in the following.

The attention directing use of Open Book Accounting

The attention directing use of financial and nonfinancial information is well established within the accounting literature (Simon et al., 1954, Gordon et al., 1978). In their classic study, Simon et al. (1954) for example noted:

“It has been noted that reports are used for their value in directing attention to trends and drifts, to underlying causes of recurrent day-to-day problems, and generally to matters that may escape attention in the course of direct supervision” (ibid, p. 28).

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OBA might direct attention to interdependencies with existing and new business partners that are naturally difficult to perceive by direct supervision (e.g.

Dekker, 2003, Kajüter and Kulmala, 2005, Alenius et al., 2015). Dekker (2003) has for example observed how the supermarket chain Sainsbury introduces OBA with its existing suppliers and subsequently becomes aware of its interdependencies with those in general and with regards to logistics in particular. It accordingly directs more attention to these areas. Kajüter and Kulmala (2005) observe how an automobile manufacturer uses OBA with new suppliers to direct their attention to important aspects of interdependence right from the start of the relationship. Moreover, OBA might not only direct attention to interdependencies with directly connected business partners, but also indirectly connected ones (e.g. Cooper and Yoshikawa, 1994, Dekker and van Goor, 2000, Kulmala, 2004). Cooper and Yoshikawa (1994) observe for example how OBA can direct the buyer’s attention to the indirect interdependencies it has with its supplier’s sub-suppliers.

Relationships might include a range of different interdependencies that might be perceived or not depending on the OBA design. The OBA design influences thus to which interdependencies business partners direct their attention. Mouritsen et al. (2001) observe for example how a certain OBA design directs the business partners’ attention to functional and interface requirements in one case while another OBA design, used in another relationship, directs the partners’ attention to direct and indirect manufacturing costs. The design of OBA and its attention directing use can thus be perceived as closely interrelated.

The decision facilitating use of Open Book Accounting

Calling attention to particular aspects of business is often insufficient. In order to solve concrete problems, firms need to make decisions, which might be facilitated by accounting information (Simon et al., 1954, Gordon et al., 1978). Simon et al. (1954) observed for example that firms often draw on accounting information from standardised reports and particular analyses to understand concrete problems, evaluate alternative solutions and, finally, make decisions.

This use has also been noted for OBA (Tomkins, 2001, Agndal and Nilsson, 2008, 2010). Tomkins (2001) has for example noted the importance

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of OBA when mastering particular events in a relationship, which includes the consideration of different alternatives and a joint agreement on the actions to be taken. Agndal and Nilsson (2008) identify seventeen decisions that are supported by OBA in the relationship between a large car assembler and a supplier of complicated plastics and rubber parts. Those include supplier selection, decisions on component design, who should carry out certain operations, investments into specialised tools and price revisions.

Decision making in business relationships is of high complexity, providing OBA with a particularly important role. While business partners might for example sometimes take decisions that only affect their own firms based on OBA information, decisions usually affect several, legally independent firms. These firms might possess different kinds of knowledge that is important to consider when forming a decision and might also be affected dif- ferently by individual decisions (Dekker and van Goor, 2000, Tomkins, 2001, Baiman and Rajan, 2002a, Dekker, 2003, Cooper and Slagmulder, 2004, Kajüter and Kulmala, 2005, Agndal and Nilsson, 2008). While a decision might for example be beneficial from a total cost perspective, these benefits might be distributed inequitably among the concerned companies. One partner might for example need to invest additional resources and encounter higher costs, while the resulting cost benefits are reaped by the other partner (Dekker, 2003, Agndal and Nilsson, 2008). Decision making is further complicated by that it is non-hierarchical and builds on compromises as to how potential benefits might be shared (Van der Meer-Kooistra and Scapens, 2008). Moreover, relationships are dynamic. Decisions might accordingly be of temporary character only and subject to continuous reassessments (see e.g. Alenius et al., 2015, Håkansson et al., 2010).

OBA can facilitate decision making in such complex settings as it allows business partners to consider “what each party wishes to achieve from the collaboration, how feasible the goals and relative roles are and what actions need to be taken” (Tomkins, 2001, p. 171). OBA thus enables the pro-active consideration of the consequences of particular decisions for the concerned actors, thereby making their introduction more likely (Dekker, 2003).

The decisions made with the help of OBA might differ depending on the interdependencies and the OBA design at hand. Agndal and Nilsson (2010)

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find for example large differences with regard to the decisions that are supported by OBA in three different kinds of relationships. A vehicle manufacturer uses OBA for example in its supplier relationships to decide on suppliers, component (re-) designs, manufacturing process improvements and the pricing of the purchased components. In contrary, a retail chain uses OBA mainly to decide on changes in logistics and joint purchases of e.g.

packaging material. Understanding the particular decision facilitating use of OBA, given certain OBA designs and interdependencies, is thus important.

2.3 Resource interdependence

An important concept that requires further definition is interdependence. In this thesis, the focus lies in particular on the interdependence that arises in specific focal buyer and supplier relationships. At the same time, it is acknowledged that individual business relationships are embedded in other relationships (Granovetter, 1985, Uzzi, 1997) and interdependence as well as OBA might thus sometimes stretch across several relationships.

2.3.1 Interdependence in the industrial network approach

The industrial network approach is one theory that has been developed from several hundred case studies with the aim to understand the interdependencies that accrue in individual, embedded buyer-supplier relationships (Håkansson, 1982, Håkansson and Snehota, 1995, Håkansson et al., 2009, 2010). According to the research perspective, business partners are naturally interdependent with each other to different degrees. This is so as interdependence not only provides benefits, but also involves costs (Gadde and Snehota, 2000, Håkansson and Ford, 2002). Interdependence might for example imply increased coordination costs and constrain the ability to interact with third parties (Gadde and Snehota, 2000). In addition, it might direct innovation efforts into a certain direction, which might lead to problems in the long term when alternative technologies become more important (Håkansson and Ford, 2002, see also Christensen, 1997).

According to the industrial network approach, interdependencies arise as firms interact over time across many different exchange episodes and adapt

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their activities, resources and actor identities to each other, which provides their relationships with a specific substance (Håkansson and Snehota, 1995, Ford and Håkansson, 2006). Interdependence between activities arises as firms coordinate different technical, administrative or commercial activities that are carried out within and between firms. Activities build on resources that business partners invest into and combine with each other. Interdepend- ence between resources arises as business partners adapt their resources to each other. Finally, as activities and resources are coordinated and combined, in- terdependence arises between actors. Actors establish bonds and shape each other’s identities. According to the industrial network approach, individual relationships are embedded in larger activity patterns, resource constellations and actor webs that might support and/or constrain certain changes within individual relationships (Håkansson, 1982).

2.3.2 Focus on resource interdependence

Empirical studies usually focus on one of the three levels of analysis (Håkansson and Snehota, 1995, Gadde and Håkansson, 2001). In the context of this study, particular focus lies on resource interdependence. According to Ford and Håkansson’s (2006) words, “[r]esources are at the heart of interdependence. The interdependencies between actors relate closely to the fact that their respective resources are not isolated but are related to each other”

(p. 14). Scholars have applied the perspective in different fields, such as industrial marketing and purchasing (Håkansson and Waluszewski, 2002, 2007, Waluszewski et al., 2009), strategy (Baraldi, 2008) and accounting (Lind and Strömsten, 2006, Baraldi and Strömsten, 2008, 2009, Carlsson-Wall et al., 2009, Alenius et al., 2015), and shown that it captures well this important element of interdependence.⁴

In the context of this thesis, the focus on resource interdependence provides two specific advantages. First, most prior studies on OBA provide de- tails on the resources that are combined within particular relationships. This

4 For a more complete list of publications and PhD theses building on the resource layer of the industrial network approach, see Baraldi et al. (2012).

OPEN BOOK ACCOUNTING AND RESOURCE INTERDEPENDENCIES

OPEN BOOK ACCOUNTING AND RESOURCE INTERDEPENDENCIES

OPEN BOOK ACCOUNTING AND RESOURCE INTERDEPENDENCIES

Open Book Accounting and Resource Interdependencies

The Case of Capital Equipment Sales Christoph Schneider

Akademisk avhandling

Open Book Accounting and Resource Interdependencies

The Case of Capital Equipment Sales

Open Book Accounting and Resource Interdependencies

The Case of Capital Equipment Sales

Christoph Schneider

Foreword

Acknowledgements

Contents

List of Tables

List of Figures

Chapter 1

Introduction

1.1 The concept of interdependence in the study of Open Book Accounting

1.2 Problematizing prior research on Open Book Accounting

1.3 Aim of the thesis

1.4 Outline of the thesis

Chapter 2

Analytical framework

2.1 Motivating the analytical link between Open Book Accounting and interdependence

2.2 Open Book Accounting

2.3 Resource interdependence